Chapter 2: Debate on Liquidity Intensified (1963–64)
- International Monetary Fund
- Published Date:
- February 1996
By April 1963 the Situation had Changed considerably. Most central bankers and monetary officials had begun seriously to question whether the world’s supply of liquidity would continue to be sufficient, especially as the world economy in general, and international trade in particular, expanded further.
Two developments brought about this heightened interest in the liquidity problem. First, in 1962 members’ official reserves (including their gold tranche positions in the Fund)1 did not grow, whereas in the previous three years they had risen from some $60 billion to about $65 billion.2 There had been, in particular, a notable change in gold reserves: in most postwar years some $500–700 million of gold had been added to the official holdings of countries and international agencies, but the figure was much smaller in 1960 and again in 1962. Political and economic uncertainties had led to abnormally large private hoarding of gold. Meanwhile, world trade had been continuing to rise by an average of 8 per cent per annum.
Second, central bankers and other financial officials were coming to the realization that, as the United States succeeded in its efforts to reduce its payments deficit, there would be a slowdown in the growth of the exchange holdings of other countries and thereby in the growth of world reserves. Insofar as U.S. deficits had been financed by other countries accumulating liquid claims on the United States, these deficits had led to increases in the world totals for international reserves. Since increases in liquid claims on the United States had, since 1958, been enlarging world reserves by nearly $1 billion a year, the elimination of the U.S. balance of payments deficit would dry up the largest source of additions to reserves.
On July 18, 1963, President John F. Kennedy called attention to the latter problem in a special message to the Congress on the U.S. balance of payments: “One of the reasons that new sources of liquidity may well be needed is that, as we close our payments gap, we will cut down our provision of dollars to the rest of the world.”3 At the opening session of the 1963 Annual Meeting of the Board of Governors in Washington, on September 30, 1963, President Kennedy again referred to the problem of world reserves posed by the elimination of the U.S. payments deficit, and announced that “the United States, therefore, stands ready to support such measures as may be necessary to increase international liquidity.”4
Official Positions Develop
Accelerated interest within the Fund in the subject of liquidity was reflected in the Annual Report for 1963.5 As the Report was drafted, the line of thought of the two previous years, that the Fund was already a principal supplier of international liquidity, was developed further. It was to influence the liquidity debate for years to come. The figures for reserves published in the Report included members’ gold tranche positions in the Fund along with their holdings of gold and foreign exchange. The inclusion was explained in the following way: since February 1952 members had been able to count on receiving the overwhelming benefit of any doubt for drawings in the gold tranche, and the clarification of July 1961 that the Fund’s resources could in certain circumstances be used to meet deficits arising from capital transfers had made these gold tranche positions virtually freely usable.
Furthermore, the Report noted, international liquidity, a broader concept than that of reserves, included credit tranche positions in the Fund, defining credit tranche position as the amount a member could draw beyond the gold tranche before the Fund’s holdings of that member’s currency reached 200 per cent of its quota.6
At this time, too, the conviction began to develop that additions to conditional liquidity, such as those created by the Fund, were more to be desired than expansion of unconditional liquidity. This view, which was held by several Executive Directors but was expressed most strongly by Mr. Pieter Lieftinck (Netherlands), stemmed from an apprehension that too easy access to reserves would encourage inflationary policies.7 Hence, the Executive Directors strengthened a passage drafted by the staff for the 1963 Annual Report to read as follows:
If improvement or enlargement of the credit facilities is needed, it may be more important and feasible to concentrate on the adaptation or enlargement of the existing multilateral arrangements through the Fund than to seek to establish supplementary or alternative arrangements outside. In this connection, it should be evident that the Fund, in its further evolution, would be capable of accommodating itself to the emerging needs for such enlarged facilities.8
Regarding the adequacy of such international liquidity as already existed, including positions in the Fund, the Executive Directors concluded that the supply available in 1963 was large, stating that “most countries already have sufficient reserves or access to credit arrangements, particularly in the Fund, to finance the kind of disequilibria that might occur.”9 It was a guarded conclusion, however, and concern was expressed for the adequacy of liquidity in the future:
… if a substantial proportion of [liquidity] is, for one reason or another, considered to be available “for emergency use only,” then the risk is correspondingly increased, not only of slowing down the world economy but also of being unable smoothly to deal with emergencies. …
The quantitative and qualitative adequacy of the international liquidity structure requires continued close attention. The Fund must keep developments in this field under constant review in order to anticipate the problems that might arise. In this way, the Fund will be in a position in good time to take, or to propose to its members, any requisite action.10
Active Role for the Fund
Mr. Pierre-Paul Schweitzer became Managing Director on September 1, 1963, succeeding Mr. Jacobsson, who died suddenly in May. After being Managing Director for one month, Mr. Schweitzer, in his first opening address to the Board of Governors, set out an active role for the Fund in any deliberations concerning liquidity that might ensue. He was, of course, aware that the Finance Ministers and Central Bank Governors of the ten countries participating in the General Arrangements to Borrow—Belgium, Canada, France, the Federal Republic of Germany, Italy, Japan, the Netherlands, Sweden, the United Kingdom, and the United States—now meeting together from time to time as the Group of Ten, had decided in the summer of 1963 to consult among themselves during the next 12 months on problems of international liquidity and the international monetary system and were planning to issue a press release on this subject during the Annual Meeting. Mr. Schweitzer expressed his belief that “insofar as it is found necessary from time to time to expand the level of world liquidity by international action, the Fund will be found to be the instrument through which the bulk of the required expansion can most suitably be carried out,” and explained that “the provision of supplementary international liquidity is, after all, one of the principal reasons for which the Fund was set up and is a matter with which it is concerned from day to day.”11
He went on to say that the Fund’s policies and practices could be modified, and if need be the Articles of Agreement could be amended, to enable the Fund to continue to play an effective role in the provision of international liquidity. And he announced that in the coming year the Fund would develop and intensify its study of international liquidity.
Most Governors, especially those representing countries outside the Group of Ten, welcomed the proposed inquiries by the Fund. This position was exemplified by the words of Mr. Harold Holt (Australia), who commended the Fund for its decision to develop and intensify its study of international liquidity, stressing that all countries had a direct and vital interest in the matter: “That is why so many of us believe that the Fund should continue to exercise a leadership in this field and why, in our judgment, decisions finally adopted should be decisions taken by the Fund after due process.”12
Group of Ten Studies
The Finance Ministers and Central Bank Governors of the Group of Ten held a special meeting during the course of the 1963 Annual Meeting, after which they announced their intended studies. In their communiqué they “noted that the present national reserves of member countries, supplemented as they are by the resources of the imf, as well as by a network of bilateral facilities, seemed fully adequate in present circumstances to cope with possible threats to the stability of the international payments system.” But it appeared to them “to be useful to undertake a thorough examination of the outlook for the functioning of the international monetary system and of its probable future needs for liquidity.”13 The communiqué also specified two premises for their studies: fixed exchange rates would continue to be the basis of the international monetary system, and the price of gold would remain unchanged.
The Group of Ten noted with approval Mr. Schweitzer’s statement that the Fund would “develop and intensify its studies of these long-run questions” and instructed their Deputies, in carrying out their studies, to maintain close working relations with the Fund and with other international bodies concerned with monetary matters. As for the Fund, Mr. Schweitzer, discussing the outcome of the Annual Meeting with the Executive Directors on October 16, 1963, said that he visualized a very close working relationship between the Fund and the Group of Ten in their parallel examinations. There would be a full interchange of ideas. He himself would participate in the meetings of the Group of Ten at the ministerial level, and he would send representatives to the meetings of the Deputies. The staff would produce memoranda for the Executive Board as its studies progressed, and copies of these would be available, through the Executive Directors, to the monetary authorities of the members of the Group of Ten.
Thus, following the 1963 Annual Meeting, intensive studies concerning liquidity and the broader topic of the international monetary system began both in the Fund and in the Group of Ten. These important issues also attracted considerable attention among economists outside official circles. Not since the Fund had been created had international monetary subjects so engaged the interest of specialists everywhere.14
Expansion of Liquidity versus Balance of Payments Adjustment
The speeches of the Governors at the 1963 Annual Meeting revealed a divergence of view between those who favored expansion of the world’s supply of liquidity and those who emphasized elimination of balance of payments disequilibria. This controversy was to surface many times in the coming years. The fear expressed by those who urged elimination of balance of payments deficits before world liquidity was expanded was this: Would not too much liquidity tempt the large industrial countries that had been running persistent deficits, especially the United Kingdom and the United States, to pay too little heed to their deficits and to engage in overexpansive financial policies?
Mr. Valéry Giscard d’Estaing (France), in particular, voiced his fears of this risk, a position he was to repeat for the next several years. At the 1963 Annual Meeting he contended that the fundamental difficulties confronting the international monetary system were not due to any shortage of international liquidity but to three structural weaknesses in the system: (a) the lack of mechanisms to correct balance of payments deficits; (b) the asymmetry between countries whose currencies were held as reserves by other countries, and which thereby had an easy means of financing deficits, and the rest of the world, which had no such means; and (c) the unevenness between countries of the risks of holding reserves, depending upon the type of reserve—those countries that held gold running the least risk that their holdings would be subjected to devaluation.15
The U.S. authorities, however, considered the conflict between the need to expand liquidity and the need to restore balance of payments equilibrium more apparent than real. Mr. C. Douglas Dillon (United States) wanted to make it “crystal clear: the United States does not view possible improvements in the methods of supplying international liquidity as relieving it of the compelling and immediate task of reducing its own payments deficit.” Adjustments in balance of payments situations that were in chronic deficit or surplus had to take place. The critical question was how the adjustments were to be made. Balance could be—and too often in the past had been—forced by measures that endangered domestic stability or the prospects for growing international trade.16
Others, including Mr. Schweitzer, took the position that whether what was needed was more liquidity or better equilibrium depended on the time span one had in mind:
International liquidity … consists of international reserves and other resources which are at the disposal of monetary authorities and which serve to finance balance of payments deficits, and thus provide time to make any adjustments that may be required to eliminate those deficits without resort to measures that would be damaging to the prosperity of the countries concerned or to the rest of the world.17
Mr. Maudling (United Kingdom) took a similar line:
The primary purpose of international liquidity is to give time for individual countries to make adjustments in their balance of payments without sharp changes in the volume of imports or in the growth of domestic demand. But at the same time the availability of liquid resources should not be such as to promote, or encourage countries to tolerate, the continuance of basically unsound domestic or international positions in the guise of temporary fluctuations. The basic dilemma is clear. If adequate resources are not available automatically or nearly automatically, their usefulness in times of trouble may be problematic; but to the extent to which they are automatically available, they may present a temptation to refrain from the necessary corrections of policy.18
Framework for the Fund’s Study of Liquidity
In undertaking its examination of international liquidity, a first task of the Fund staff was to identify the areas of research in which work would be needed. On October 31, 1963, the Managing Director sent to the Executive Board a memorandum proposing that studies be made of four main subjects: the need for international liquidity; the supply and management of international liquidity; the liquidity of the Fund itself; and the operational and policy issues arising with regard to the size of the Fund’s resources and their use.
On January 10, 1964, he elaborated. Liquidity was not an end in itself, it was merely a means to the attainment of the common objectives of the Fund’s members: high levels of employment and growth, the absence of restrictions on trade and payments, and stability of prices and exchange rates. The need for liquidity was not a simple numerical concept; its composition—as between gold, foreign exchange, and credit facilities—the way in which it was distributed among countries, and the manner in which it was created were all relevant to assessing its adequacy. Any appraisal of the need for liquidity would also have to make assumptions regarding the way in which countries were likely to respond to changes in the amount of liquidity available; this in turn depended on their balance of payments policies in general. The Fund’s studies, like those of the Group of Ten, would also be based on the assumptions that fixed par values and freedom from restrictions on payments would be continued. There was no official support for fluctuating exchange rates or a return to restrictions as a means of easing pressures on available liquidity.
The dilemma of choosing between expanded liquidity and balance of payments adjustment was posed mainly by the deficit in the U.S. balance of payments. Here Mr. Schweitzer believed that there was general agreement among the U.S. authorities that the balance of payments must be brought into equilibrium as quickly as possible “without resorting to measures destructive of national or international prosperity,” the words of Article I of the Fund Agreement. As the United States had substantial means with which to finance its deficit while it was achieving a reasonable equilibrium in its payments position, the international monetary system still had much strength.
The present adequacy of international liquidity was not a matter for concern. The problem, if there was a problem, was for the longer run. Accordingly, the Fund’s work should not be done in haste. On the contrary, an undue display of urgency might easily create expectations of specific proposals by certain dates and give the impression that the Fund itself lacked confidence in the present monetary system. Care was necessary that confidence in reserve currencies not be undermined as revolutionary proposals were discussed. It was, moreover, essential that new grafts to the international monetary system not damage the plant they were intended to improve.
Mr. Schweitzer further suggested that, as part of the Fund’s study of liquidity, the general adequacy of quotas and the Fund’s policies on gold tranche drawings also be examined. But in addition he thought that, if it should be found necessary to create more international liquidity of the unconditional variety, the Fund could be adapted to enable it to provide such liquidity. Therefore, he asked the staff to explore possible techniques.
The Executive Directors, sensitive to the attention being given to the subject by the Group of Ten, on the whole reacted very favorably to the Managing Director’s suggestions. Mr. William B. Dale (United States) thought that history might well record that the initiative from the Fund in the field of international liquidity began with this statement. Mr. A. F. W. Plumptre (Canada) noted that a general view seemed to be forming that some sort of alterations to the international monetary system would, after study, prove to be desirable. The problem for the Fund was that future changes or adaptations or improvements could come within the structure of the Fund or from outside. The Fund could acquire increasing functions and responsibilities or it could sit passively and watch its influence and authority drift away.
When the Executive Directors continued their discussion of the Managing Director’s statement in informal session on January 17 and 20, 1964, most of the Directors for countries not in the Group of Ten commended the broad range of the Managing Director’s speech. Mr. J. M. Garland (Australia), for example, noted that the statement did not ignore the groups who were watching these discussions rather anxiously over the shoulders, as it were, of the main participants. The Managing Director had outlined a positive role for the Fund and had given the Fund a strong and stimulating lead.
The Fund Adjusts Policies on Its Resources
The question of how the Fund’s policies regarding its resources might be adapted to provide additional liquidity to its members was tackled first. In the next several months, the Executive Board took decisions further liberalizing gold tranche drawings and recommending a second round of increases in quotas.
Although the Annual Report for 1963 had included gold tranche positions in the Fund as part of members’ official reserves, a few limitations on members’ access to these positions still remained, and these might inhibit some members from including them in their reserve figures. One such limitation was time: the procedure for handling requests for drawings, including the preparation of a staff memorandum, its consideration by the Executive Board, the dispatch of instructions to the Fund’s depository to transfer the appropriate currency, and the actual transfer, took a full week. Therefore, in December 1963 the staff suggested some modifications in procedure that would permit gold tranche drawings to take place more quickly and more nearly automatically. After several discussions, the Executive Board took a decision on August 3, 1964 putting these modifications into effect.19 Later, when the Articles were amended, gold tranche drawings became legally automatic.
The other drawing facilities of the Fund, in the credit tranches, were much larger, totaling about $13.4 billion at the end of 1962. But even these were below what they had been two years before, in spite of an expanded membership and some adjustments of quotas. Hence, it was to this important segment of liquidity that the Fund began to direct its attention late in 1963. The emphasis on credit tranches was in line with two Fund views—that the Fund was an important source of international liquidity, and that the conditional liquidity which it provided had advantages over unconditional liquidity.
After considerable discussion, the Executive Board concluded in mid-1964 that there was a case for a second round of increases in quotas. The normal practice would have been to begin a quinquennial review of quotas at the end of 1964 with a view to reaching a decision by the end of 1965, but there seemed to be merit in considering quotas as promptly as possible after the Annual Meeting, which was to be held in Tokyo in September.20
At the 1964 Annual Meeting the Governors resolved unanimously that the Executive Directors should proceed to consider the question of adjusting the quotas of members of the Fund and at an early date submit an appropriate proposal to the Board of Governors. The Governors’ speeches made it clear, however, that there were differences of view with respect to the size and urgency of a general increase in quotas and with respect to the amount and number of special adjustments of quotas.
Action on this second round of quota increases was actually not completed until early in 1966, the process proving to be longer than that of the third quinquennial review of 1959. On February 24, 1965, the Executive Board adopted a report, Increases in Quotas of Members—Fourth Quinquennial Review, that included two resolutions: one proposed a general increase of 25 per cent in all quotas, the second proposed special increases for 16 members.21 By March 31, 1965, both resolutions had been adopted by the Governors. By February 23, 1966, members representing the required two thirds of the total of quotas had consented to increases in their quotas. On March 9, 1966, the Executive Board decided that the fourth quinquennial review of quotas had been completed. As a result of that review the Fund’s assets were, in the course of the next two years, expanded from $16 billion to close to $21 billion.
General Subject of Liquidity Examined
In addition to these actions by the Fund affecting conditional liquidity, in 1963–64 the staff began intensive studies of a number of basic questions concerning liquidity in general: How could the world’s requirements for liquidity be judged? Was the present total satisfactory? What were the relative functions of conditional and unconditional liquidity? How might the Fund expand unconditional liquidity?22 What were the issues involved in managing international liquidity?23
These studies were exploratory. Among other things, they revealed that it was going to be difficult not only to judge the need for international liquidity but also to obtain a consensus among countries that any given expansion or contraction of liquidity was desirable. A further tentative conclusion was that the advantages of conditional liquidity from an international standpoint were such that the need for conditional liquidity should be fully met before any scheme for unconditional liquidity was established. Nonetheless, it was possible that the long-term upward trend in liquid reserves would be inadequate and would need to be supplemented by some form of unconditional or nearly unconditional liquidity. This type of liquidity, too, could be provided through the Fund.
The staff studies also noted that much of the discussion about the inadequacy of international liquidity, or projections of its future inadequacy, disguised in technical dress problems that were really political. Issues that greatly affected countries’ interests were at stake: How much discipline would countries have to impose on their balance of payments? Who would own the bulk of the world’s reserves?
Although the topic of liquidity was not discussed at length in the Executive Board for several months following the Annual Meeting, the Directors were kept abreast of developments by papers prepared by the staff, by oral reports from the staff and from the Managing Director, and through informal seminars of staff and Executive Directors. Consideration of the drafts of Chapters 3 and 4 of the Annual Report for 1964, entitled “International Liquidity: The Issues” and “The Fund and International Liquidity,” provided an opportunity to review the topic. Although some Directors were reluctant to have much detail in the Annual Report, it was the consensus that the Fund’s Report had to go into matters in as much depth as would the forthcoming report of the Deputies of the Group of Ten. These chapters became the vehicle by which the Fund’s views on liquidity in mid-1964 were made public. The Executive Directors stated their view that
the determination as to whether the available supply of liquidity is adequate or inadequate must always be a matter of judgment, and a collective judgment is particularly difficult to arrive at because the balance of advantage, at any rate in the short run, may be different with respect to, and in the opinion of, different countries. Action in the liquidity field which absorbs unemployment in one country may promote excessive demand in another, and any change in the supply of international liquidity is likely to involve some transfer of resources, at least temporarily, between countries.24
Following this carefully qualified position, the Executive Directors concluded that the general level of international liquidity was broadly satisfactory, but that this did not mean that its distribution among countries or the supply of each type of liquidity was equally satisfactory. Emphasis was placed on the fact that, as the United States reduced its payments deficit, the expansion of holdings of dollars as reserves would not continue at the same rapid rate. Therefore, it was desirable and timely to explore possible ways to meet any inadequacies in the supply of international liquidity. However, any new arrangements for creating liquidity should be based on a multilateral institutional approach, which would be open to a worldwide membership and which would ensure that liquidity was made available on appropriate terms and conditions.
The Report also made clear that the Fund might enhance the supply of unconditional liquidity in a number of ways. One way was to give members firmer assurance of access to the credit tranches. Another was to allow members, on the occasion of quota increases, to pay their gold subscriptions to the Fund in some other form so that they could retain their gold. A third possibility was investment by the Fund: the Fund might purchase assets, other than the currencies which it acquired in connection with drawings, for the purpose of enhancing members’ international liquidity. The Executive Directors intended to give these matters further study in the year ahead.
Group of Ten Reports
Deputies’ Emphasis on Multilateral Surveillance
Paralleling the Fund’s studies were those of the Group of Ten. During the period spanning late 1963 and early 1964 the Deputies of the Group of Ten held several informal meetings, where they spoke in their personal capacities. In April 1964 they began to take committed positions, as representatives of their countries, and thereafter held frequent formal meetings. Mr. Robert V. Roosa (United States) was chairman until October 1964, when Mr. Otmar Emminger (Federal Republic of Germany) became chairman.
On June 15 and 16, 1964, the Deputies presented to their Ministers and Governors the report which they had prepared in response to the request of the previous September.25 This report, largely the work of Mr. Emminger, Mr. André de Lattre (France), Mr. Roosa, and Mr. Emile van Lennep (Netherlands), was published two months later as an Annex to the Group of Ten’s Ministerial Statement.26 By design, it was released to the public on the same day, August 10, 1964, as the Fund’s 1964 Annual Report. The reports were closely linked. The Managing Director had participated in the meetings of the Ministers and Governors in Paris in December 1963 and June 1964; Mr. J. J. Polak, Director of the Research and Statistics Department, had participated in the Deputies’ meetings; and the technical papers prepared by the Fund staff had been made available to the Deputies.
The Deputies’ report stressed the relationship between the process of adjustment and the need for international liquidity. Therefore, before examining the liquidity problem it was necessary to look into the procedures for maintaining balance of payments equilibrium and for correcting imbalances when they occurred. The Deputies suggested that Working Party 3 of the Economic Policy Committee of the oecd should study how the members of the oecd, both individually and collectively, and compatibly with the pursuit of essential domestic objectives, could in the future preserve better balance of payments equilibrium and achieve faster and more effective adjustment of imbalances.
The Deputies further proposed that the processes of multilateral surveillance be continued and intensified. These were techniques, including the Fund’s consultations, whereby officials from participating countries could review from time to time the balance of payments positions of other participants, the measures taken to adjust balances, and the means of financing them. All countries of the Group of Ten should provide the bis with statistical data bearing on the means used to finance surpluses or deficits in their external accounts, and these data would be combined by the bis and supplied in confidence to all participants and to Working Party 3 of the oecd.
Ossola Group Established
The Deputies’ report also reviewed briefly various methods of meeting possible future needs to expand reserve assets, apart from the two methods already existing under the gold exchange standard—the flow into monetary reserves of new gold and of additional currency balances. Two proposals were considered—one for the introduction, through an agreement among the countries in the Group of Ten, of a new reserve asset, which would be created according to appraisals of an overall need for reserves; the other for a form of international asset similar to the gold tranche or similar claims on the Fund, the volume of which could, if necessary, be enlarged to meet an agreed need.
But proposals of this kind raised complex questions. How would any new reserve asset be made compatible with the existing international monetary system? How could liquidity be directed to the point of greatest legitimate need at any given time? How could the volume of reserves be adapted to global needs rather than to the shortages of reserves of individual countries? What effects would a new reserve asset have on the relations of the Group of Ten with the rest of the world? What machinery would be required for controlling the volume and distribution of the reserves that were created? What would be the desirability of creating a reserve asset for a limited group as opposed to an asset available on a worldwide basis?
To examine these and other similar questions, the Deputies established a group to study “owned” reserves—a term used to describe reserves that countries had at their own disposal, as distinct from “borrowed” reserves, which more closely resembled credit. This Study Group on the Creation of Reserve Assets became more widely known as the Ossola Group, after its chairman, Mr. Rinaldo Ossola, of the Bank of Italy.
The Ministerial Statement issued by the Group of Ten on August 10, 1964 reflected the relatively small area of agreement among these countries. The Finance Ministers and Central Bank Governors of the Group, under the chairmanship of Mr. Giscard d’Estaing, agreed that supplies of gold and reserve currencies were fully adequate for the present and possibly for the immediate future. They were willing also to state that the continuing growth in the volume of world trade and payments was likely to entail a need for more international liquidity. But they were much less definite about how this need might be met: it might possibly be met by an expansion of credit facilities and, in the longer run, perhaps by some new form of reserve asset. Meanwhile, they agreed to support a moderate general increase in Fund quotas during 1965 and to re-examine the question of renewing the General Arrangements to Borrow.
The Ministers and Governors elaborated their position. The smooth functioning of the international monetary system depended on the avoidance of major and persistent payments imbalances and on the effective use of appropriate policies by national governments to correct imbalances when they occurred. Therefore, as a sequel to the study of liquidity by the Group of Ten, they agreed to the suggestion made by their Deputies and invited Working Party 3 of the oecd to embark on a study of the balance of payments adjustment process.
That the area of disagreement among the Group of Ten was still wide was more evident in the reactions to the Ministerial Statement than in the statement itself. One particularly strong reaction, for instance, was that of the Subcommittee on International Finance of the U.S. House of Representatives’ Committee on Banking and Currency (under the chairmanship of Mr. Henry S. Reuss). That subcommittee issued a press release expressing its disappointment that these recommendations went only a little way toward providing necessary improvements in the international monetary system. The subcommittee urged that the U.S. monetary authorities give full support to the suggestion of the Fund’s Managing Director for creating liquidity in some way through the Fund.
Positions at Tokyo
As a result of these discussions and reports, the points at issue in the debate on international liquidity had become a great deal clearer by the time of the Nineteenth Annual Meeting, in Tokyo in September 1964. A more sophisticated terminology had emerged: terms like conditional and unconditional liquidity, owned as against borrowed reserves, and multilateral surveillance were now used frequently. But even more important, the speeches of the Governors gave, for the first time, some indication to the world at large of the positions of the major countries. As these positions became known, it became more possible than before for informed public opinion—as expressed, for example, by members of the U.S. Congress and the British Parliament and by private bankers and monetary specialists—to participate in the shaping of governmental attitudes.
Areas of Agreement
Mr. Holtrop (Netherlands) found in the three reports—the Fund’s Annual Report, the Ministerial Statement of the Group of Ten, and the report of the academic economists27—evidence that general agreement seemed to have been reached on at least four important propositions.28One, there was agreement that the proper functioning of the international payments system depended on the pursuit of national policies aimed at the avoidance or early correction of major and persistent imbalances. From this it followed that the proper function of reserves, and of international liquidity generally, was not the provision of real resources, but only the cushioning of such reversible imbalances as were unconnected with the movement of real resources and the temporary financing of more fundamental imbalances during the period necessary for corrective measures to become effective.
Two, there was agreement that the supply of international liquidity should be neither too abundant nor insufficient. At the one extreme, corrective internal policies might be delayed too long and inflationary tendencies would prevail; at the other extreme, the system would be threatened by deflationary bias and by the pursuit of policies, such as restrictions and protectionism, inimical to international cooperation. The present supply of liquidity seemed ample, if not overabundant; at any rate, there was no immediate shortage.
Three, there was agreement that it was both unlikely and undesirable that in the future the supply of international liquidity, originating from the balance of payments deficit of the United States, should continue to flow at the same rate as in the past. On the other hand, if and when this supply came to a stop, the problem of a deficiency of international liquidity might become a reality.
Four, there seemed to be rather general agreement that it would not be prudent to allow the provision of an appropriate supply of reserves, or of liquidity, to continue in the future to depend solely on the vagaries of the supply of gold for monetary purposes, supplemented by the accidental deficits of reserve currency countries and the credit facilities of the Fund in their present form. Instead, other techniques for creating reserves would have to be seriously considered.
Divergence of Views
Despite these areas of agreement, there were even more areas of disagreement, and the Managing Director, in his remarks at the closing session of the Tokyo meeting, referred to a “stimulating divergence of views.”29 Strong differences of opinion still attended the question of how urgently something needed to be done about expanding the supply of liquidity. Several of the Governors for the countries of the Group of Ten insisted that the emphasis should be placed on members’ policies in respect of balance of payments adjustment rather than on ways to increase total liquidity. Mr. Karl Blessing (Federal Republic of Germany) and Mr. Emilio Colombo (Italy) took this line.30 Mr. Giscard d’Estaing again stressed the risk of inflation if liquidity became excessive, and this time he also emphasized the role of gold in the international monetary system:
The world monetary system must be set in concentric circles: the first one being gold, and then, the second, if necessary, recourse to deliberate and concerted creation of either reserve assets or credit facilities.
The inner circle is gold.
Experience in recent years has shown us that, aside from any theoretical preference, gold remains the essential basis of the world payments system.31
At the same time, he did not believe that the rate at which gold was mined would spontaneously adjust its volume to world needs. Thus, it might be necessary to seek out supplementary sources for supplying owned reserves, but the creation and volume of any new reserve asset would have to be governed by strict rules.32
Mr. Holtrop and others welcomed the agreement of the countries of the Group of Ten on multilateral surveillance as a means of adapting credit facilities to the particular type of imbalance that might have to be financed.33 In fact, a great deal was heard about multilateral surveillance during the Tokyo meeting. It was defined by Mr. Maudling as follows:
This phrase was very carefully chosen because the possible alternative of “discipline” has a different significance in different languages. It is intended to represent a step forward along the road of increasing consultation and cooperation in monetary and economic affairs which we have been following ever since the end of the war. Our agreement does not give any member of the Group of Ten, or indeed the Group as such, a veto on the setting-up of new facilities within the Group or between members of it, or on the use of existing facilities. It does, however, recognize very clearly that agreements made between individual countries may well be of close interest to other members of the Group, and that the interest of these other members should be taken fully into account when new arrangements are made.34
A second big area in which agreement was still far from being achieved was whether new liquidity should be channeled through the Fund or should be provided by some other agency. This question turned on the parallel question whether any innovative forms of liquidity should be available universally—that is, to all countries—or to a limited group of countries.
The view that the Fund was the appropriate agency for administering international liquidity because of its worldwide membership was voiced by many Governors for developing countries. The remarks of the Chairman of the 1964 Annual Meeting, Mr. Francisco Aquino h., the Governor for El Salvador, are an example:
The problem of international liquidity is one which rightly concerns all members of the Fund. It is true, perhaps, that the efficiency of the international monetary system is largely dependent on the effective cooperation of a relatively small number of countries; but it serves the interests of all. …
I should like, therefore, to urge that whatever action may be the outcome of the present deliberations in the Fund and elsewhere will be taken within a truly multilateral framework such as that provided by our meeting.35
Some of the Governors for the countries of the Group of Ten cited the advantages of international credit arrangements. Mr. Dillon thought that it was “highly significant” that the studies both by the Group of Ten and by the Fund had concluded that the present system was functioning well and that any changes should be designed, in the words of the Fund’s Annual Report, to “supplement and improve the system where changes are indicated, rather than to look for a replacement of the system by a totally different one.36 Mr. Maudling likewise believed that the best course was to build on the Fund:
I think, indeed, there is danger in too much emphasis on owned reserves as opposed to credit facilities. In the Fund, we have a system which operates by making available to deficit countries on a temporary basis the currencies of surplus countries. I believe that, for many purposes, such a system may be the most suitable and flexible instrument.37
Nevertheless, voices were heard against this view. Mr. Colombo suggested that the need for developing countries to participate in the distribution of additional international liquidity should be satisfied by the general increase in quotas that was being recommended, and Mr. Holtrop explained his Government’s position favoring a limited participation.38
Managing Director’s Position
Mr. Schweitzer made it abundantly evident, both in his opening address and in his concluding remarks, that he was in favor of a universal approach through the Fund. In his opening address he said that
where decisions are taken to create and administer liquidity by deliberate international action, it is particularly important that the advantages of the multilateral institutional approach be kept in mind. An international organization provides the forum for a balanced consideration, and hence the best reconciliation, of the various objectives in the international financial field as they affect all countries.39
And in his concluding remarks he said:
A large number of members have emphasized in varying degrees the need to take such further steps as may be desirable to strengthen international liquidity within the framework of the Fund rather than on a more restricted basis. I would here again stress what I said in my opening remarks to this meeting. The world cannot be clearly divided into two groups, the developing and the industrial countries.40
In summing up the 1964 Annual Meeting, Mr. Schweitzer was particularly heartened that the multilateral institutional approach to the liquidity question had been given such widespread support. He called attention to the fact that multilateral surveillance, and even discipline, on a truly multilateral basis had long been part and parcel of the Fund’s operations. And he noted a consensus among the Governors that another increase in Fund quotas was not a solution to the liquidity problems that might arise in the future; therefore, the Fund would continue to study the problems involved in the creation of liquidity.
Gold tranche position: the amount a member could draw without increasing the Fund’s holdings of its currency beyond 100 per cent of its quota, excluding certain holdings arising from compensatory financing operations. For each member, that amount began by being equivalent to the member’s gold subscription to the Fund, and it was for this reason that the tranche was called the gold tranche. Further information on the nature of the gold tranche can be found in Joseph Gold, The Stand-By Arrangements of the International Monetary Fund: A Commentary on Their Formal, Legal, and Financial Aspects (Washington, 1970), pp. 13–14 (hereinafter cited as Gold, Stand-By Arrangements), and in Chap. 13 below, pp. 255–56.
Because of the absence of data for other countries, the Fund’s statistics for the total official reserves of the world during the years covered in this volume were those for the members of the Fund plus Switzerland.
Department of State Bulletin, Vol. 49 (1963), p. 259.
Address by the President of the United States, Summary Proceedings, 1963, p. 5.
Annual Report, 1963, Chap. 3.
Drawings beyond this point could be permitted by waiver.
In the text of this history, Executive Directors are identified by the country of their nationality. For the Directors that are elected, however, this is only an indication of their constituencies. A complete listing of the Executive Directors, their Alternates, and the countries that appointed or elected them (as well as the country of nationality of both the Directors and their Alternates) for the period 1966–71 is given in Appendices A–1, A–2, and A–3, to this volume. Management and senior staff as of the end of 1971 are listed in Appendix B. The same kind of information for the period 1946–68 is given in Appendices A and B to Vol. I of History, 1945–65.
Annual Report, 1963, p. 51.
Annual Report, 1963, p. 51.
Annual Report, 1963, pp. 51–52.
Opening Address by the Managing Director, Summary Proceedings, 1963, p. 29.
Statement by the Governor of the Fund and the World Bank for Australia, Summary Proceedings, 1963, p. 71.
Statement Issued on October 2, 1963 by the Secretary of the Treasury of the United States on Behalf of the “Group of 10” Members of the Fund, Summary Proceedings, 1963, pp. 285–86.
For example, Fritz Machlup and Burton G. Malkiel, eds., International Monetary Arrangements—The Problem of Choice: Report on the Deliberations of an International Study Group of 32 Economists (Princeton, 1964).
Statement by the Governor of the World Bank for France, Summary Proceedings, 1963, pp. 60–61.
Statement by the Governor of the Fund and the World Bank for the United States, Summary Proceedings, 1963, pp. 44 and 52.
Opening Address by the Managing Director, Summary Proceedings, 1963, p. 27.
Statement by the Governor of the Fund for the United Kingdom, Summary Proceedings, 1963, p. 65.
For a fuller discussion, see History, 1945–65, Vol. I, pp. 564–67.
This fourth quinquennial review of quotas was covered in History, 1945–65, Vol. I, pp. 574–85, and Vol. III, pp. 458–65.
The report was published in History, 1945–65, Vol. III, pp. 458–65.
J. Marcus Fleming, “The Fund and International Liquidity,” Staff Papers, Vol. 11 (1964), pp. 177–215.
Oscar L. Altman, “The Management of International Liquidity,” Staff Papers, Vol. 11 (1964), pp. 216–47.
Annual Report, 1964, pp. 28–29.
See pp. 28–29 above.
Group of Ten, Ministerial Statement of the Group of Ten and Annex Prepared by Deputies ([Washington], 1964).
See footnote 14 above.
Statement by the Governor of the Fund for the Netherlands, Summary Proceedings, 1964, pp. 63–64.
Concluding Remarks by the Managing Director, Summary Proceedings, 1964, p. 198.
Statements by the Governors of the Fund for the Federal Republic of Germany and Italy, Summary Proceedings, 1964, pp. 53 and 108.
Statement by the Governor of the World Bank for France, Summary Proceedings, 1964, p. 205.
Ibid., pp. 206–207.
Statement by the Governor of the Fund for the Netherlands, Summary Proceedings, 1964, pp. 67–68.
Statement by the Governor of the Fund for the United Kingdom, Summary Proceedings, 1964, pp. 166–67.
Opening Address by the Chairman, Summary Proceedings, 1964, pp. 10–11.
Statement by the Governor of the Fund and the World Bank for the United States, Summary Proceedings, 1964, p. 42, and Annual Report, 1964, p. 32.
Statement by the Governor of the Fund for the United Kingdom, Summary Proceedings, 1964, p. 168.
Statements by the Governors of the Fund for Italy and the Netherlands, Summary Proceedings, 1964, pp. 106 and 68–69.
Opening Address by the Managing Director, Summary Proceedings, 1964, p. 28.
Concluding Remarks by the Managing Director, Summary Proceedings, 1964, p. 200.